This theory into practice final project is written on the topic of ‘Costs & Benefits for Raising Capital through Different Sources’. Major aim of this theory into practice report would be to let know readers about all of form funding sources (that would make possible for the companies in meeting their working capital needs). It has been understood that the method or process of acquiring capital through different sources is termed as Financing Decision. The Corporations are actively recruiting financial managers mainly for the successful execution of financial decision.
Generally, there have been various sources of funds that could be utilised by companies for meeting their working capital needs. It has been observed that with the utilisation of funds from different sources not only made possible for the underlying firm to survive through difficult periods but would help it in expanding its operations as well. All of these sources are classified in to five main classes: Internal Financing, Security Financing, Lease Financing, Loan Financing and other sources. Internal financing intends on the approach of reinvesting of company’s earning either for meeting working capital needs or for expanding company’s operations. Security Financing is all about issuing of company’s shares of different kinds.
A company could source capital through loan financing which is determined as an agreement that it would repay principal amount it to the lender in a specified time along with monthly interest payments. Lease financing is actually an agreement between two parties under which one party is interested in using other party’s asset for a specified period. Venture capital is considered as relatively new source of finance. From an investor point of view, it is most risky investment. In accordance with trade credit, it is an option would be given to a company to procure goods by its supplier(s) without paying anything to them in advance. Overdraft is basically provided in a form of special facility to a company in any sector by banks to withdraw more cash from a company than an actual amount. It has been understood from the findings of this report that each source has positive and negative aspects. Company’s management should have to analyse impact of each source on the company’s position in the long term.
Table of Contents
Chapter-1. Background Context
1.1. Background Context
1.2. Motivation
1.3. Aims & Objectives
1.4. Method of Analysis
1.5. Description of Chapters
Chapter-2. Literature Review
2.1. What is meant by Financing Decision?
2.2. Capital Structure
2.3. Agency Theory
2.4. Trade-Off Theory
2.5. Sources of Funds
2.6. Internal Financing
2.6.1. Retained Profit
2.7. Security Financing
2.7.1. Ordinary Shares
2.7.2. Preference Shares
2.8. Loan Financing
2.8.1. Bank Loans
2.8.2. Debentures
2.9. Lease Financing
2.9.1. Operating Lease
2.9.2. Finance Lease
2.10. Other Sources of Financing
2.10.1. Venture Capital
2.10.2. Trade Credit
2.10.3. Overdraft
Chapter-3. Case Studies
3.1. Case Study on UK Government’s Bailout Package for Bank
3.1.1. RBS (Royal Bank of Scotland)
3.1.2. Llyods Banking Group PLC
3.1.3. Barclays PLC
3.1.4. Findings
3.2. Case Study on Shanghai General Motors Corporation (SCMC)
3.2.1. Findings
Chapter-4. Analysis
4.1. Analysis
Chapter-5. Conclusion & Recommendations
5.1. Conclusion
5.2. Recommendations
Chapter-6. References
Objectives and Research Scope
This report aims to provide a comprehensive overview of various funding sources available to corporations for meeting their working capital needs, evaluating the merits and demerits of each to assist management in making informed financing decisions.
- Identify diverse funding sources utilized by modern companies.
- Analyze the significance of financial decision-making in capital management.
- Compare unique features and characteristics of internal and external financing.
- Evaluate positive and negative aspects (costs and benefits) of specific capital sources.
- Examine real-world applications through case studies of corporate financing strategies.
Excerpt from the Book
2.8.1. BANK LOANS
Bank Loans are determined as readily available form of debt. Generally, this financing instrument relied on three factors that used to be taken into consideration at the time of signing a loan agreement between a company and a bank (Cumming, 2012). Company must need to have good credit history in order to raise funds through this source otherwise a bank would demand for higher rate of interest (Slee, 2011). Pros and cons of this source have been shown below:
Pros
A company could raise funds through this source for financing its long term projects.
This sourcing form does not incorporate the risk of transforming of company’s shareholders’ wealth.
The rate of interest used to be decided at the initial stage which meant the company would not have any difficulty in regard to making financial projections.
Cons
Main demerit of this source is that it always used to be backed by a company’s asset. Bank used to hold that asset as collateral. Bank also holds an authority of selling that asset if a specified company won’t able to repayment of interest or principal amount.
Summary of Chapters
Chapter-1. Background Context: Introduces the importance of financing decisions and outlines the report's motivation, objectives, and methodological approach.
Chapter-2. Literature Review: Details various sources of capital including internal financing, security financing, loan financing, leasing, and other sources like venture capital and trade credit.
Chapter-3. Case Studies: Examines real-world applications of financing strategies, specifically focusing on bank bailouts in the UK and the joint venture financing of Shanghai General Motors.
Chapter-4. Analysis: Synthesizes the literature and case studies to evaluate the practical implications of different financing choices for corporate performance.
Chapter-5. Conclusion & Recommendations: Provides a final summary of findings and suggests directions for future research regarding the impact of capital sources on long-term firm competitiveness.
Chapter-6. References: Lists the academic and professional sources consulted throughout the research project.
Keywords
Financing Decision, Capital Structure, Working Capital, Internal Financing, Security Financing, Loan Financing, Lease Financing, Venture Capital, Trade Credit, Overdraft, Cost of Capital, Financial Leverage, Bailout Package, Corporate Finance, Shareholders' Wealth.
Frequently Asked Questions
What is the fundamental focus of this report?
The report focuses on exploring various funding sources and their respective costs and benefits to help companies effectively meet their working capital needs and attain corporate objectives.
What are the primary thematic areas covered?
The core themes include internal financing, security financing (shares), loan financing (bank loans, debentures), lease financing, and other specialized sources such as venture capital, trade credit, and overdraft facilities.
What is the primary objective of the research?
The goal is to inform readers about the diverse funding options available and to analyze the merits and demerits of each to facilitate sound financial decision-making.
Which scientific method is utilized in this study?
The report follows a secondary research approach, utilizing the case study method to connect literature reviews with real-world corporate financial practices.
What topics are discussed in the main body?
The main body covers the theoretical frameworks of capital structure, detailed descriptions of internal and external funding sources, and practical case studies involving major corporations like RBS, Lloyds, and Shanghai General Motors.
Which keywords define this work?
Key terms include Financing Decision, Capital Structure, Working Capital, Debt, Equity, Financial Leverage, and Cost of Capital.
Why did Barclays refuse the UK government's bailout offer?
Barclays rejected the bailout because its management was confident in supporting operations through retained profits and was concerned about the monitoring aspects tied to government support.
What makes venture capital a unique source of financing?
Venture capital is noted as a relatively new and high-risk investment source, typically provided to entrepreneurs with innovative ideas where profit-sharing is pre-negotiated at the project's inception.
How does a company benefit from choosing Trade Credit?
Trade credit improves a firm's cash inflow by allowing them to procure goods without immediate payment, providing flexibility and a buffer during periods of decreased market demand.
- Quote paper
- Junaid Javaid (Author), 2015, Costs and benefits of raising capital through different sources, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/304687
